Earnings Call: Q4 2019

Feb 20, 2020

Ladies and gentlemen, thank you for standing by. I am Hailey, your Chorus Call operator. Welcome and thank you for joining the Fresenius Medical Care earnings call on the fourth quarter and full year twenty nineteen results. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question I would now like to turn the conference over to Dominik, Head of Investor Relations. Please go ahead. Thank you, Haley. We would like to welcome all of you to the Fresenius Medical Care earnings call for the fourth quarter and full year twenty nineteen. We appreciate you joining today. We did surprise you with an early publication yesterday evening, which was solely triggered by a technical issue. I do apologize for keeping you at the offices late last night. Now it is my very big pleasure as always to start out the call by mentioning our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that have been distributed yesterday. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. With us today is, of course, Powell, our CEO and Chairman of the Management Board. Ruiz will give you some more color around the strategy and the recent business development and go through some of the major topics of the quarter. With us today for the very first time is Helen Gieser, our new Chief Financial Officer, who will give you an update on the financials and the outlook. I will now hand over to Rice. The floor is yours. Thank you, Dominic. Hello, everyone. It's great to have you with us today. I'd like to especially welcome Helen. She's been with us since November 1, and she keeps coming back every day, so it's a good day. Helen will give you a financial update, and she's going to present on how we are approaching simplification of our disclosures and our outlook for 2020. And I'll share with you my prepared remarks on the overall business and the development in Q4 and full year 2019. And let's start my prepared remarks on Slide three. First and foremost, I want to point out to you that we delivered on our guidance for 2019. Yes, we had significant headwinds that were impossible to anticipate at the time that we gave you guidance. But the negative effects of the ESCOs is a great example of something that really did come out of the blue for us that we've dealt with. We did compensate all of this year where we were focused on investments in home dialysis and our growth markets. We stuck to the plan to invest in 2019 in order to reap the benefits in the future years. And we'll talk more about that. We had a very strong performance in our underlying business throughout the year as well as our cost and efficiency initiatives ran quite well over the course of 2019. In the fourth quarter, we delivered 5% adjusted revenue growth. We had solid contributions from all of the regions in the growth category, if you will. And as is our custom, we are proposing the twenty third consecutive dividend increase. We will propose that for the annual meeting in May. And we are confirming our guidance for the financial year 2020. More to come on that in Helen's piece of the presentation. Moving to Slide four. I won't spend a lot of time on this. You see the growth categories across clinics, patients, and treatments. We continue to expand our infrastructure and education efforts to increase the number of treatments that we performed in the home setting. You'll see some more on that later. And as always, we operate at the highest level of quality that we possibly can. And I'll touch on that in the slide here in just a moment. Moving to slide five, we just want to come back and ground you that the organic growth drivers in this business remain intact. We expect 6% growth rate to continue over the next years. And we still believe in 2025, we will be just shy of five million patients on dialysis. And you can see the breakout of the regions as we usually show you. I will not read those to you off of the chart. Moving to slide six, a little more information on Home. Beyond these developing economies initiative that we started back in 2016, we are making great progress. At the end of twenty nineteen, home dialysis accounted for thirteen percent of all treatments in The U. S. This corresponds to an increase of 100 bps compared to 2018. The number of home treatments grew by 17% year on year. And by 2022, we aim to perform more than fifteen percent of all dialysis treatments in The US in a home setting. And we believe we're well on track to achieve this target. As we announced in 2018, the investments in our home training facilities, educational staff and materials, in addition with the scale up of the distribution infrastructure that supports both home products and services, it was a clear focus of our 2019 capital allocation. And we aim to increase awareness for early recognition of chronic kidney disease in order to try to have a smoother transition for our patients into dialysis as we possibly can. Turning to slide eight and looking at our quality indicators. As you look at these, there's consistency in all of the regions from quarter to quarter. I do want to point out, I was asked earlier today about this, why would you see hospital days at 10.3 in The US versus 4.3 in Latin America or 2.3 in Asia Pacific. And as we've talked about this over days in days past, we have very good complete consistent data in North America and EMEA and we're very comfortable with those days. We do know in Latin America as well as in the Asia Pacific region, not all patients have a chance to be hospitalized. It is not as well established a system, if you will. So there are some gaps in the data. But nonetheless, we give you what we have in order to give you some sense of what the trends look like. I think the key thing here is we are making progress in the hospitalization days and trying to reduce them as we go through time. Now turning to Slide nine. In the introduction, I mentioned that we delivered on our full year 2019 guidance. I think two developments I'd like to make noteworthy. Revenue growth in our guidance definition reached 5%, which is exactly in the midpoint of the guidance that we had given you. And in the Q2 and Q3 earnings call, we guided to you that the adjusted net income would come into the low end of our guidance. And as we had predicted, it in fact did. Turning to Slide 10, looking at the fourth quarter story. It was a good story for us. The growth trends are continuing. If you look at revenue and net income in Q4 contributed to our overall achievement for the full year. Our growth story continued with organic growth of 5% resulting in a 4% increase in adjusted revenue at constant currency. And adjusted net income was stable on a constant currency basis as well. Turning to Slide 11 and beginning to look at the regional discussion. Each region contributed to the strong organic growth of 5% in the fourth quarter. The highest contributions in absolute terms came from North America with a solid 3% revenue growth at constant currency. And from Asia Pacific with a strong 7%. I'd like to take a moment, I'm going to go off script for just a moment, and make a comment about the coronavirus situation in China. We are totally focused on making sure that we can continue to treat our patients in China as well as support our employees through what is a very, very difficult time. We are unable at this point today to try to give you any kind of quantification of what this event or these events may mean for us economically at this point in time. As we have a better idea, we'll communicate that. But it would be pure speculation for us at this point to try to give you any sense of that. So we'll refrain from it. But have you know that we continue to be focused on those things that we can do to help our patients and our employees in this difficult time. We saw solid growth in Europe, Middle East and Africa. And a very strong increase in Latin America, as usual, America is somewhat driven. It has a tailwind from the high inflation adjusters that we see in many of those markets from time to time. Looking on Slide 12 and focusing on the fourth quarter in Healthcare Services. In The US, the same market growth again performed nicely. We are at 3.4%. As you know, that's in the back up in the detail. But I think it's worth noting that I don't like to round down. I like to just tell you the way it is. So 3.4 in the quarter. As you know, the development in the region was somewhat negatively impacted by the increased adjustment for accounts receivables and a legal dispute. Helen will walk you through that in some detail if you have questions on it. So there's some muted performance here. But nonetheless, we're still proud of 3.4%. EMEA Services saw organic growth of 5% in the quarter. And the Asia Pacific growth was supported by Dialysis Care and their Care Coordination business. Now turning to Slide 13 and to Products for the quarter. We saw continued growth in the Products business for the fourth quarter. North America had an excellent performance of 16%. The Core Products business delivered 4% organic growth. And when you consider that they were working off of a high base from the prior year, we also had some negative impact from IFRS 16. It's phenomenal what they were able to get accomplished. And obviously, the NxStage acquisition has been a help for us in the home hemodialysis product sector as well. EMEA grew 2% on a reported basis as well as on an organic basis, so they continue to do well. Asia Pacific delivered 6% growth. And as we've said, Latin America is at 15% on an organic basis. And obviously there is some inflation adjustment that's having an impact there. Moving to Slide 14. I've already mentioned this. We will propose a new record dividend of 1.2 at the AGM in May. It's our twenty third consecutive dividend. And if you look at a growth CAGR over the last five years, we're right at 10.7%, 10.8% in that return. We will deliver the dividend continuity despite our investment year in 2019. And also to create additional shareholder value, as you well know, we launched a share buyback program in 2019. Up until June, we will repurchase shares in the total amount of about €1,000,000,000 Between March and December shares have been bought back at a total purchase price of approximately €600 Moving to Slide 15, global sustainability. We've met with a number of investors over the past twelve to eighteen months where we had very lengthy discussions about environmental, social and governance activities. This topic comes up quite a bit. For that reason, I want to spend a minute to update you on the implementation of Fresenius Medical Care's global sustainability program. We have set up a very comprehensive global sustainability initiative that reports directly to me. In the first phase, we'll be focusing on developing for the identified eight materiality areas, management concepts and policies, as well as setting up the required reporting infrastructure to collect comparable and consistent data throughout our global organization, reminding you that we have 42 factories around the world. We sell products in 150 countries. We provide service in 50 markets. And yes, we operate 4,000 clinics approximately around the world. So we have a lot of data at our fingertips, but we have to get at it in a consistent, readable, actionable way. And that's what this structure will bring us as we go forward. Once we've completed the activity, then we'll be able to assess and set targets for the key performance indicators that will take us into the next phase of our program on environmental and social governance. Turning to slide 16, which is my last slide. After an investment year in 2019, we plan to deliver profit growth in 2020. With our profitable investments in the expansion of home dialysis, the optimization of our clinic network in The United States and the further expansion of our footprint in developing economies, we believe that we've laid the foundation for further sustainable profitable growth on a global basis. We continue to look forward to more clarification on the details of the President's Executive Order from The US. We want to ensure that we can capture benefits from that Executive Order for our patients and for our shareholders. The same is true for the Medicare Advantage opportunity, which will come in 2021. Many of you will have questions about this. We'll try to answer what we can. And we'll also give you a calendar of events that I think will explain to you our thinking as we go through the course of this year into next year. And at this point, it's my pleasure to turn the reins over to Helen. Thank you, Rice. Good morning or afternoon, ladies and gentlemen. It's my pleasure to be here today. Having been appointed in November, this is my first earnings call with all of you, and I look forward to many, many more to come. Let me start my first presentation as the new CFO with some color on my priorities, focus and approach to simplification. Slide 18 outlines my key priorities. One of the first priorities is to simplify our guidance going forward. There's a vast level of financial detail that we provide, and that has created the impression that the business has many more moving parts, which is not the case. Therefore, I would like to simplify the message moving forward. I know that reducing the level of complexity goes hand in hand with less data points, but that is management's job to make educated estimates and provide guidance to you. Another priority for me is that we deliver on our savings target for our global efficiency programs. We plan to achieve 150,000,000 to €200,000,000 of sustained savings by the end of twenty twenty. We achieved savings of around 40% in the first two program years, and we expect the remaining 60% of savings potential to be realized in 2020, which marks the third and final year of our program. As Rice mentioned, with regard to our share buyback program, we are on track. At the end of last week, we had bought back a volume of close to 9,000,000 shares for a total amount of $6.00 €8,000,000 Naturally, capital allocation is a key focus for me. Balancing the triangle between investing in future growth, deleveraging and direct return to shareholders is critically important. We have and will continue to work hard to deliver high quality products and services around the globe. And at the same time, we will further optimize our working capital and enhance cash flow from operations. Now let's move from a very high level statement to a very detailed look at our regional performance in Q4 on Slide 19. I'll start with North America. Rice has already outlined the revenue perspective, and I will focus on the earnings side. I won't walk you through all the drivers on this slide, but I will highlight a couple. On the positive side, we had a tailwind from calcimimetics also in Q4, which most likely doesn't surprise anyone. And Care Coordination was not impacted by an ESCO write back like in the previous two quarters, and we had a positive contribution from a divestiture of Care Coordination activities. On the negative side, after reviewing the adjustments made in Q3, we have taken a further provision for accounts receivable in legal dispute. Based on this approach, I do not expect this topic to reoccur. Additionally, we have seen the expected ramp up of our spend of our cost optimization program in North America, which negatively impacted the margin on a reported basis. I move on to Slide 20 to have a look at the other three regions. Based on solid top line results in all of our regions, we achieved a margin improvement in Q4 in EMEA and Latin America. Due to investments in current and future growth in our services business in Asia Pacific, such as starting up new clinics, we saw a decline in the margin in this quarter. Let me sum up the regional developments for you on Slide '21. As announced in 2018 and mentioned by Rice earlier, 2019 was an investment year. The investment year was complemented by our cost optimization program, which had the main portion of spend in Q4. Therefore, our operating income remained basically stable on a reported basis at €616,000,000 If we look at the adjusted basis, which also excludes the cost optimization program, the effects of the NxStage acquisition and the IFRS 16 implementation, our operating profit was up by 3% and stable at constant currency at €655,000,000 I've outlined some of the positive and negative contributors to this development already on the regional slides. And in the interest of time, I won't repeat those. So let's move on to Slide 22. The operating cash flow increase in Q4 as well as for the full year is driven by the implementation of IFRS 16, leading to a reclassification of the repayment portion activities. Operating cash flow was negatively impacted by settlement payments for pension plans in The United States. On a quarterly comparison, you see that we have improved from 16.2% to 16.8% of revenue. CapEx increased slightly by €36,000,000 reflecting a higher spend on our clinical network. Free cash flow at €434,000,000 is substantially better than last year. And lastly, when you look at the leverage ratios on the bottom left of the page, excluding IFRS 16, leverage is at 2.5x, up from 1.8x at the end of twenty eighteen. This was mainly due to the NxStage acquisition. And including the IFRS 16 impact, we're at 3.2 times net debt to EBITDA. We turn to Page 23. In the material we published last night, you already saw that we confirmed our targets for 2020. As per the guidance that was issued in February 2019. It's important to outline that this is true for the definition we had applied back in February. Our target is to achieve mid to high single digit growth, both in terms of revenue and net income at constant currency. We received a lot of pushback due to the complexity of the definition applied to our target setting and the corresponding reporting. What you see on this slide is the previously communicated basis for 2020 and the effects we excluded in order to make the business performance comparable. Following the request for simplification from many of you, we have decided to clean up and reduce the complexity of how we report going forward. For our new reporting approach, from now on, we will include the effects of the next stage operations and the effects from IFRS 16. We have intensively communicated in the past year the order of magnitude of each of the impacts on 2020. This now results in less moving parts to track the year as we move forward. As we move to Slide 24, to be fully transparent, you see here a reconciliation from our previously communicated target basis to our simplified approach of including the negative effects from IFRS 16 and next stage operations. Turning to Slide 25. Here, you can see the simplified targets on a constant currency basis. The only exclusion that we reserve to make is the special items that are unusual in nature and are not foreseeable or not foreseeable in size or impact today. Some have asked if we shouldn't narrow the range or upgrade guidance given that some of the headwinds that we faced last year should not reoccur this year. Please be aware that there are also sizable headwinds that we need to take into account, such as significantly lower operating income contribution from calcimimetics and lower saving rates in our ESCOs, just to name two. We also need to take into account that we handle around 50 countries in services and around 150 in products. Therefore, there may be some more moving parts and varying health care systems to be taken into account than for other players in the health care or med tech sector. For those reasons, I prefer we stick to our guidance at this point in time. And with that, I'll turn it back to Dominik. Thank you, Helen. Thank you, Rice, for the presentation. It is our custom to limit the number of questions to two in order to give everyone the chance to ask questions. Please note 2A, B3. We are a bit limited in time today, but if there is time left and there are further questions, we are more than happy to go a second round. I hope this works for everyone. I'm happy to turn it over to Q and A. Haley, could you please open the line? Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. If you are using speaker equipment today, please lift a handset before making your selections. And the first question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead. Good afternoon and thank you for taking my questions. I will limit myself to two. My first question is on the guidance and it is a fairly wide range Helen as you remarked. It'd be great to hear from both you and Elyse, how you feel at this stage, your degree of confidence at the high versus the low end of the guidance. Is it high at both ends? Is it higher at one of the parts? If you can just help us think through sort of where within that guidance range you feel most comfortable and confident that would be helpful. And then my second question is on Medicare Advantage. And I'd be curious, Rice, to get your thoughts on the data that CMS put forth a couple of weeks ago, which was showing MA penetration going up to thirty three percent in 2021 and then up to forty two percent in the medium term. So based on your sense for the market and the patients, does that seem reasonable to you? And how are you thinking about that opportunity as you move towards 2021 and more importantly, the summer enrollment period? Thank you. Hey, Veronica. I think we'll have Helen take your first question. And since you've asked me to take your second one, I'll gladly do that. But Helen, go ahead. Thanks, Veronica. We feel very comfortable with our guidance of mid to high single digit. We don't feel that we need to narrow that guidance or peg ourselves at one end of that at this time. So we feel that that's appropriate guidance for us at this time of the year. And on your second question, Veronica, relative to the Medicare Advantage, I am aware, I did see correspondence on the high percentages that I think are there, thirty three percent in 2021 and forty two percent I think it is in 2022. The way we're looking at this is we will get our best idea of what's going to happen here in the fourth quarter enrollment period. And so I think it's very likely that we'll be sitting in this room this time next year having been able to tally fourth quarter enrollment and give you a sense of what we're seeing. We certainly expect that there'll be growth. There's no question there. But right now, it'd be pure speculation to try to understand. And we think we have to let the enrollment in the fourth quarter, open enrollment, inform us of what we're seeing and where we're going to go from there. But we will continue to stay close to CMS and talk with them as we move through time. But the ball will really get rolling in the open enrollment period in the fourth quarter. Thank you for that, Reef. I guess DaVita has made maybe somewhat cautious statements on how quickly they think MA will be taken up in the ESRD patient population. Do you share those views? Or are you thinking about it slightly differently? I guess there'll never be a call that we don't compare. The next question comes from the line of Oliver Metzger of Commerzbank. Please go ahead. Hi, thanks a lot for taking my questions. The first one is also on Medicare Advantage. So with the bit to become more present, could you describe your conversations with health insurers about higher respective reimbursed in the future? Are we, just in general, open to accept some higher rates in the context that you can treat patients more holistic, which, again, eventually reduce hospitalization rates? My second question is on dialysis product growth rates for next year. Could you give us an indication whether you expect some uptake of underlying product growth rates following the annualization of the next stage acquisition, whereas a significant share of products that you consume for yourself. So are you expect still a pickup in momentum of this underlying growth of next stage? Or do you basically absorb all growth from Next Stage to fuel your own home strategy in Dialysis Service? I don't hear anyway. The next question comes from the line of Tom Jones of Berenberg. Please go ahead. Good afternoon. Can you hear me okay? This is with your problems on the line. Nope. I can't hear anything. Oliver had the same problem, I think. Hello, operator? Anybody? Hello? Ladies and gentlemen, we apologize for the pause in the presentation. Please remain online. Hailey, are you back? Yes. We will now resume with the Q and A. The next question comes from the line of Tom Jones of Berenberg. Please go ahead. Thanks for taking my question. I'm happy to drop out if Oliver wants to follow-up, but maybe I'll ask my two questions first and then he can come back because I think he got cut off as well. Forgot where I was. Rice, one question for you on home dialysis. We tend to think of this as about mainly a U. S. Opportunity. But I was just wondering now one year on how you're thinking about the international opportunity in home dialysis. And then maybe a question for Helen. It would be helpful if you could kind of drill down to the extent that you're willing to on the North American EBIT margin or the EBIT performance in North America. I mean if we take the revenue adjustment and one off gain from the Care Coordination side out of the equation, It was an exceptionally strong Q4 performance. So it would be intriguing to know kind of what shifted between Q3 and Q4 to drive such a solid performance in Q4. And how much of that was kind of one off? And how much of that might well carry on into 2020? Sure, Tom. And let me apologize. We were getting music on our side of the equation here. It was actually pretty nice music, but we couldn't hear anything else. So I'm beginning to worry about the coincidence of last night, what happened, and tonight. So we'll have to figure this out. But home dialysis internationally. So I think there's going to be growth there. I think it is clearly going to come in a little bit different way. And what I mean by that, Tom, is we know now in some of the emerging markets in Asia Pacific, they are starting what they call PD first therapy. Meaning that if you're going to go on dialysis, Malaysia, Thailand, couple of places like that, they're going to put you on PD because they don't have an infrastructure to build their own set of clinics. They're not willing to let us come in as a private company and do it. And so there's going to be growth because that's the only mechanism they're going to allow is putting people on PD. Now we'll share in that because obviously we have PD products, etcetera. But it's a little disheartening to me only from the sense that therapy is not going to be great for everybody. We have done the integration in Europe of NxStage working through the distributor network they had and getting our people here on board with that. I would say the one thing that you have to understand is that we've done quite well with home hemodialysis in EMEA using current equipment that we have. They were able to adapt one of the in center machines, and it works quite well. So I think we're going to see international growth. I think Asia will go quicker as a developing market, as I said. I'll remind you that we have a very high percent of patients treated at home in Hong Kong, which people don't generally recognize. About forty percent are treated at home. Australia has been in the twenty five percent, thirty percent range for quite a while. But I think there's such a large concentration of patients in The U. S. It will lead the charge, if you will, and probably be the most visible, particularly given the executive order and what we see the U. S. Government wanting to try to do. Perfect. That makes sense. On the Yes. North American Thanks, Tom. So on a reported basis, as you rightly point out, we did have the negative effect for the revenue recognition adjustment for the accounts receivable in legal disputes. We also were impacted by the cost optimization costs and some higher personnel expenses as well as the effect of, on a reported basis, next stage, of course. But on the positive side, we really are seeing, as we've already alluded to, some really strong underlying business performance. We got the favorable impact from higher calcimimetics, the orals as well as some benefit from our margins from prior year effects. But we feel really good about the underlying business here on in North America. Tom, I would add that we continue to see good progress in the commercial mix. If you look at our same market growth, it was strong. So I would say many of the things that we told you we had to work on and we would work on going back to 2018, the benefits are there and we're feeling good about that. Good. That's all very clear. I'll jump back in the queue. You bet. The next question comes from the line of Oliver Metzger of Commerzbank. Please go ahead. Hi. Thanks a lot for taking my questions. I'm not sure what happened, but I will ask them again. It's about a first on Medicare Advantage. Now visibility becomes more present. So could you describe your conversations of health insurances about respective compensation structure in the future? Are they open to accept, in general, a higher reimbursement rate in the context that you can treat patients more holistic, which, at the end, might lead us to lower hospitalization rates. So how are these discussions? My second question is on dialysis product growth rates for next year. Next stage will annualize Basically, you absorb some meaningful share of growth from Next stage. So the number you've indicated over recent quarters, to which extent this will add to product growth rates? Or do we absorb basically everything growth to boost your own home dialysis service business? Okay, Oliver. Let me take your first question and I'll let Helen take your second question and I'll chime in if necessary. So what I would say is we've had and we're having conversations with the providers in the Medicare Advantage world. I think they understand what we're capable of doing and trying to deliver lower hospital days and driving better outcomes. We understand that they want that at a rate that works for them. So I would tell you, I think discussion, the negotiation will be what it's always been. Who gives me the highest level of care, the fewest hospital days, the better control of my patients. And we want to do it at a fair rate. So I would say there's not been a big change in the dynamic of this conversation as we go through and we look at Medicare Advantage come January 1. I think we'll have the same dynamics we've had. We're very comfortable with our capability and what we offer people, and we'll see how that plays out. Next stage. Yes. Hi, Oliver. On Next stage, we were reminded this morning that today marks the one year anniversary of closing Next stage. So as you think about 2019 over 2020, you have ten point five months in 2019 versus twelve months in next twelve months in 2020, excuse me. We will not be reporting NxStage separate moving forward. That obviously now is part of our North America business and it's included in our guidance of mid to high single digits. Okay. Thank you very much. The next question comes from the line of Sebastian Walker of UBS. Please go ahead. Hi, thanks for taking the question. I'm to try my luck with three quick ones. So first, just calcimimetics. I was wondering whether you could quantify the operating income impact in 2019 and what you expect for 2020? The second one is how should we think about Care Coordination profitability and growth for 2020? And then the last one is just on home penetration. The 15% plus target in 2022 doesn't seem particularly aggressive. Do you think that you could achieve a materially higher penetration rate? Thanks. Sebastian, hi. I'm okay that you asked three because a couple of them are going to be quick answers. On the calcimimetics, we're not going to give you that detail. It's unfortunate that one of our competitors did, but that doesn't mean we have to. So we're going to pass on that one respectively. When you look at care coordination growth, I think what I would characterize this with is we are seeing what we had hoped to see. Meaning that we're seeing improvement in the vascular access care reimbursement rates. We've seen the conversion of the Site eleven facility to the ASC where there's better opportunity to perform more procedures. That's working as well. And our renal pharmacy continues to work well. I think those are probably some of the key things. Helen, anything else you would And then on the home penetration, I'll let you talk to the guys that are running the home program. They may take exception with how easy you think this 15% is. No, I'm just joking. Look, we set up the 15% goal back in 2017. So could we overachieve that? Yes, we probably can. Are we going to be at 40%? I don't think so. So here's the way we look at it. We're going to push to the 15%. And if we think we're going to get by that, we'll communicate that with you and let you know where we are. It is clearly our goal to do more than 15% at home. So stay tuned on that one. And let's get to the fifteen percent first and then we'll go to the next iteration from there. Thanks. And just to follow-up, within care coordination, I guess, you maybe comment on how your discussions around ESCOs are going, whether we should expect any further write downs? Yeah, just anything on that would be helpful. So I think two things. No, we don't expect further write downs at this point. And I know I've been pretty vociferous about my unhappiness with some of the things in the ESCO program. The new CMMI head, Brad Smith, has been on board now for about three to four weeks. We will be seeing if we can get in to see him in the next couple of weeks and have a chat with him and see kind of where they are with some of the commentary that we've been giving them and some of the questions we've been asking. In all fairness, we have to let him get his feet on the ground and get started. But we're going to continue to push on that until they tell me I can't come back. And they haven't done that yet. So we'll keep working the issue. Great. Thank you. The next question comes from the line of Michael Jungling of Morgan Stanley. Please go ahead. Great. Thank you. I have two questions. Firstly, on the 2020 guidance, probably one question for Helen. Does the guidance include any sort of unusual items or unusual gains? For instance, last year, I think we had Xenios in there, and it turned out in the end that it was sort of planned as part of the guidance. So is there anything in there that you can guide to that is perhaps quite large or single in nature? And then question number two is around home dialysis. And when do you think we'll get some indication how CMS will want to provide an incremental incentive or the structure around home dialysis to be able to deliver on the presidential order for greater home dialysis? Thank you. Go ahead, Helmut. Yes. Thanks, Michael. I'll take the first one. Our 2020 guidance does not include any unusual or large items. As you saw from our simplified guidance moving forward, it does exclude special items. So nothing of one time or big that's planned in 2020. Michael, on the executive order, I kind of stage my answer this way. We're still in discussions as an industry with CMS and the government about the commentary that we laid into them relative to the structure of the architecture of what they want to try to do, particularly in mandatory model. I think we're going to have to get out of that discussion with them, where they're going to go and when is this going to happen. And then we can start trying to figure out, well, is there going to be incremental reimbursement? What's going to potentially come for that? I think it's we got to do the first part before we even get to the second part. But I will say that we have actively, as an industry, had dialogue. There's been back and forth. We just have not received anything that says, Okay, here's the next iteration of plan, if you will, or pilot, whatever you want to call it. So we're going have to kind of stay tuned on that a little bit. Okay. Okay. Thank you. And maybe a quick question on Where do you see profitability for Next Next in 2020? I recognize you don't want to disclose it separately, but we had a material loss on EBIT in 2019. Shall we expect a lower loss next year or even a profit in Nextage? Just directionally, please. Yes. We won't give that guidance separately moving forward, Michael. You know when we published the guidance for Next Stage and we did the acquisition that we said it would return to profitability by the end of year three. Bear in mind that this is now just the end of year one. Yes. I would stay with what we laid out for you at that particular point in time. And Michael, we announced the deal in 2017. We all think, well, geez, aren't you at year three? And the reality is actually no, we're just now at year one at this point, the anniversary date. Okay. Thank you. The next question is from James Vanathempest of Jefferies. Please go ahead. Yes. Hi. Thanks for taking my questions. Two if I can, please. In 2022, I mean, you're looking for around 15% plus in Home Care, if there was 100 basis points improvement in that last year, and this is an increasing focus for you, what do you think would need to happen to get there a year early? I mean, is the limiting factor on developing Home Care, the availability of equipment or staffing, education, payers? Or is there something else? Just to give a sense in terms of what could potentially cause that to accelerate. I recognize you're going to sort of less when you get to the 15%. Just trying to understand the levers there. And then relating that back to the organic growth drivers of 6% patient growth, just under 5,000,000 patients in 2025. How do you also think about balancing the need for kind of new clinics versus this home care opportunity from a CapEx perspective? Thank you. James, hi, it's Reese. So here's what I would say. Looking at how we've approached and been able to achieve the growth we've seen today, the biggest piece of that comes down to our staffing and having the people on board to train and educate the patients that want to go home and they're coming into the system to go through the training. In terms of equipment, we're able to scale that up. Obviously, can't just scale ad infinitum. But at this point, I think to try to move it up a year, if you will, I think we could manage the things that need to be done in that case. But remember, no matter how much I want or how much Bill Valle, who runs North America, wants, it really does come down to that conversation between patient and physician. And are they willing to go into the training? Do they want to do the training? And then it sort of starts there and we go from that standpoint. But I would say we made the infrastructure investments in 2019. We are good for the moment. But if we were going to try to really jump another increment, we'd have to go back and just simply look at what's it going to take to be able to do that. 6% organic growth, 5,000,000 patients in 2025. What's your trade off on clinics versus home? I think as we've always said, that we are at a very high utilization rate in our clinics. We have modeled that what do our clinic de novo activities need to look like as we go out over the next couple of years. And we're going to have a need for clinics all the way out into the 2030s before we would begin to see where do we go from there. I think what you're going to find is we will always be in a mode of there'll be clinics that will get closed over time because they're in the wrong area. Maybe they don't fit the profile of where we need to be. But I think we will have less de novo clinics being built. But I think we'll manage the portfolio in a way that we can close out clinics, we can transfer patients. And it should give you some sense of comfort that the cost optimization program did exactly that over the course of twenty nineteen. So I think we can manage that. It's in our control, if you will, as to how we pick and choose to go forward there. And we have planned and looked at those details as we were contemplating the acquisition. That's great. Thank you. The next question is from Patrick Wood of Bank of America. Please go ahead. Perfect. Thank you very much. I've got two questions, please. The first would be on the wage inflation side. I'm hearing that the market is reasonably tight for a lot of staff in The U. S. Just curious as to kind of what you guys are seeing there. Do you feel it's about the same or got worse or better? Just a little bit of color on the cost base on that side would be quite helpful. And then on the second side, maybe they've spread out a bit now, but it used to be the case that some of the commercial insurance contracts would sort of bunch up and come up for renewal at a relatively similar time. I'm just curious as next year, do we have any of the larger contracts for renewal? Or is it more the year after? I'm just where are we up to on that side of things? Thank you. Yes, Patrick, it's Rice. So on wage inflation, there's no question we're at the lowest unemployment rate in The US they've seen in the last thirty, forty years. Now as you relate that back to nurses and what are we seeing, it is somewhat of a tight market. We made a shift in our thinking last year, meaning that we were more geared in 'eighteen and part of 'nineteen to hiring new nurses, inexperienced, if you will. And we found through looking at that very closely that you end up having them cost you more money than experienced nurses because of the training time they need. And so we've kind of gone the other way now where we're happy to pay for experienced nurses. They don't have the out of clinic training time, things of that nature. But you've got to manage that turnover in a very, very effective way. So we need lower attrition. And that's what we're trying to work toward. We have budgeted still around that 3% inflation. We've always tried to manage that at 2.5%. I think the clinic operators will tell you it may be a little bit higher on average to do that. But there is no question there's a tight market there. Now looking at commercial contract renewals, I would tell you we probably got one large coming due in this year in 2020. I don't think there's more than that. The regionals will still be as they always are in the fourth quarter. If I'm wrong on that, we'll communicate with you. But I think I'm pretty well I think I'm correct. We've got one big one coming. Super helpful. Thanks for taking my questions. The next question is from Ed Ridgid Day of Redburn. Please go ahead. Thank you. A couple of follow-up questions. First of on calcimimetics, Ritu, I appreciate you may not want to be the vials of mystic de vitae, but could we at least, say that the trend that they have, spoken to is something that you would be aligned with? And then, Helen, on receivables accounting, thank you for the clarity that you've given on that. And indeed, the overall clarity that you wish to bring to guidance, I think that will be welcomed. However, on the receivables, clearly, first of all, insurers will continue to dispute claims. So I just want to make sure that what exactly have you changed internally to make sure in terms of accounting that you will not need to make further adjustments such as you have the last two quarters going forward? Ed, so it's Rice. Okay, so you wore me down. Here's what I would say. Yes, we are in agreement with DaVita that calcimimetics are a headwind for this year. There's no question that will be the case. And we highlighted that for you in the third quarter that it would be a headwind. And it certainly is. We have dealt with that. It's one of the negatives that we have dealt with in the guidance that Helen has given you for 2020. And again, you know the moving parts. It's how many patients are on Parsabiv, how many patients are on the other generics, etcetera. I don't think we need to run through all of those dynamics other than to say, yes, it's a headwind. We've tried to deal with it as best we know how. And I'll turn it over to Helen for some receivable discussion. Yes. Thanks, Ed. Maybe I can give you some more color to what's changed between Q3 and Q4. As you're aware, we did take an adjustment on revenue recognition for accounts receivable in late legal dispute in Q3. And as we went into Q4, we became aware of some recoupments on previously paid services with the same payer that were in legal dispute web. So Q3 was more on the open AR and what we've taken in Q4 is a look back on closed AR, but things that are now being recouped. We needed to take a look at the statute of limitations associated with this payer, so that we could take the right reserve on a backward look regardless of whether the claim had been paid or not. So since Q3, we are you asked what are we doing to make this not happen. Since Q3, we're recognizing revenue on a much lower level moving forward. But obviously, since this is in litigation, we do we feel our arguments are strong to achieve a favorable outcome. However, resolution might take multi years. So we feel that we've taken the appropriate response the appropriate accruals, both forward looking and backward. It's now in litigation, so I can't comment too much more on that. And we'll see what the outcome will be in the future. Thank you. That's very helpful. Just squeeze in a final question. On ESCOs, I absolutely appreciate that you don't expect any further reversals. But speaking to the channel, our understanding is that given, obviously, Medicare's recalcitrantentransitent, it is probably around breakeven on where we are now. Do you expect that in 2021? Or do you think potentially, given the lack of movement there, that it could be a headwind to profitability for the Care Coordination business this year? Well, I think, Ed, what we'd say is we are still waiting on third quarter reports. For year three? Yes, for year three. Those haven't come due yet. Now I actually take that as a little bit of a positive they are listening to me complain. And we're going back and forth on it. But I think we kind of need that to have a little bit better sense. I really don't want to speculate or lay out future thoughts on that when we haven't gotten a report. So stay tuned on that. We're going to be sitting here in May doing our Q1. And so we'll see where we are. We can talk then. How about that? Thank you. The next question comes from the line of Christophe Gretler of Credit Suisse. Please go ahead. Yes. Rice. Hi, Helen. Welcome. First of all, just wanted to add, think it was a great idea to actually release earnings yesterday evening. So we kind of could properly prepare because today was a very heavy results day. So appreciate that actually that mistake in our view. And with respect to the questions, I just wanted to quickly check whether you could provide some guidance on how we should expect the phasing of your earnings growth as the year progresses now? And then maybe also some housekeeping questions, just if you could provide some guidance on tax rate, financials and corporate costs in particular that seem to be jumping around, that would be great. So Christophe, relative to phasing our earnings, we really don't lay through that kind of information. Obviously, we plan and we look at that. But I don't think it's in our best to kind of lay that level of detail out for you. We've never done that. I think historically, you know that generally first quarter is a little weaker for us and then it sort of builds as you go through the year. But we really haven't tried to do quarter to quarter phasing and communicate that or first half versus back half. So I think I'll leave it at that. And then on the tax rate, you are way outside my comfort zone. So I will turn that over to Helen and see if she has a comment on that. Yes. Hi, Christophe. I'm happy to take the housekeeping questions. So on tax, we're guiding 24% to 26%, consistent with last year, but not on an adjusted basis. So I think that's important to understand that it's now 24% to $26,000,000 On you asked about corporate costs, our guidance is $450,000,000 to $470,000,000 And then on financing costs, our guidance is 400,000,000 to $420,000,000 That's really helpful. Thank you. Welcome. The next question comes from the line of David Adlington of JPMorgan. Please go ahead. Thanks, guys. So yes, maybe two, maybe three questions. So just on the headwinds that you sort of pointed towards towards the end of last year in terms of calcimimetics and ESCOs, you've clearly managed to offset those. I just wonder what levers you pulled in order to offset those headwinds. Secondly, I mean, on the ESCOs, if you don't reach satisfactory conclusion with your discussions with CMS, just wondered what happens to latest thoughts in terms of what happens as we go into next year and whether you pull out that program? And then thirdly, just how it was bigger picture, as you've come in, you've your feet on the desk, just wondering what your biggest surprises both on the upside and the downside have been? Thank you. Hey David, it's Rice. I'll take one and two and let Helen take number three. So the headwinds, how do we deal with them? I would say this as clearly as I can. Our team is doing a great job. And the fundamentals in the business, particularly in North America, from where they've been to what doing today, they've improved greatly. Things that we told you we had to work on and fix, we have done. And I'm very proud of that. When I look at where Asia Pacific is, they're just riding the growth curve that they've got. They're trying to take advantage of their opportunities. And Europe, Middle East, and Africa really dug down. And they've done a good job. So I would tell you, we dealt with headwinds through operational efficiency and people really being able to dig in and do the things that they needed to do region to region to improve because they're not all exactly the same type of thing that they need to do. Relative to ESCOs and if that doesn't turn out favorably for us, I think I said this to you in the third quarter, we're very unlikely to want to participate in any further voluntary models if we just can't get some level of transparency and satisfaction there. And I still think that's the discussion I will have if it comes to that. Now specifically, you ask what happens to the ESCOs and where do we go. And that's a conversation that we'll need to have with the government. I think if you go through and get into the details of the executive order, particularly the voluntary models that we're trying to figure out, is there a follow on for this? Where do you go? So we'll continue to have those discussions and work on that. And we'll see where it goes. We will certainly not abandon those patients. So we'll continue to treat them. It's a matter of where they fit and what part of our business, if you will, portfolio are they in. It's value based care. I believe in it. We want to keep them there. So let's hope on the positive side that we come to a conclusion that's going to work for us in that respect. And Helen? Yes. Thanks, Rice. David, I think for me, it's definitely one of focus for us for 2020. We have some strong momentum. We know all of our pluses and minuses, our headwinds and tailwinds that we're trying to manage. And I think it's and we're very confident in our underlying business trends. So I think for me, it's one of focus, delivering on our plans, continuing to have strong communication and collaboration with all of our business units and having the visibility and transparency into that and staying close to it and kind of staying close to our main KPIs and reacting early once we see how things continue to progress as we go through the quarters. But I think this is really a year where we deliver on what we say we're going to do. Great. Thanks, guys. The next question comes from the line of Falko Friedrichs of Deutsche Bank. Two questions, please, for me. Firstly, can you give an update on the current patient mix in terms of any potential changes and if you're happy with where it currently is? And secondly, on China, can you give an update on your expansion activities and whether they are progressing in line with your thinking? Yes, Falco. So on patient mix, help me a little bit here. Are you US focused exactly? Can you give me just a little more clarity so I can direct my answer the right way? Yes, in The US, please. Okay. So what I would tell you is we are seeing improvement in our commercial mix. It's within the range of movement in a bps or basis point movement that we would expect. We are making some progress there and we feel good about that. Then beyond that, our Medicare Advantage book of business is stable. Obviously it will change as we go into next year, but right now it's stable and then we're managing our Medicare book. So we're comfortable with where we are. I think we fixed the processes that we needed to fix, particularly in the commercial book, to make sure we're getting our fair share of opportunity. So I think we feel good about that. And we monitor that each and every month. And we look at it in close detail. As far as the expansion in China, what I would say is we are still in process in our factory work. Generally, factories, particularly if it's where we're making dialyzers and certain types of products, you don't just expand them overnight. So we're still in that process. We tend to bring these things up. What I call sectionally, there are pieces we have to do infrastructure first before we get to the finish lines and the equipment, things of that nature. And then we are continuing in our acquisition of small hospitals to be able to go into a region, get to understand the dynamic in the region, the number of dialysis patients, and treat them in the hospital. And then at some point move to freestanding clinics. And we're there today at about 11, I believe, freestanding clinics. So I think we're on track there. Now obviously, we've got a headwind here to deal with the coronavirus and The most important thing for us in regards to that is healthy patients, healthy employees, making sure we're taking care of them, and getting everybody back to work when the government's going to allow that travel to happen and then to move about the country freely. Okay. Thank you. Okay. So thank you. We unfortunately have been running out of time, but everyone had the chance to ask at least one question. So unfortunately, I apologize, there's no time for the second round. But before we close, please let me make a short advertisement and mention that we will have our Capital Market Day on October 8 this year in Frankfurt, and it will be great to see many of you joining us in autumn. And with this, we actually have to close the call and we say thank you for participating in the call and have a great time. Take care. Everybody, be safe. Yes. Thanks, everyone. Bye bye. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.